Ajay Tyagi, chairman of SEBI (Reuters)
At its June 29 Board meeting the Securities and Exchange Board of India (Sebi) took firm though baby steps to introduce and recognise a new category of investors — the Accredited Investors — who are of high net worth/income. This should open up a new and wide channel of raising finance from informed and capable investors, particularly in areas where the present regulations are too restrictive.
Accredited Investors are expected to be sophisticated high net worth investors who do not need hand holding and micro-level protection by the regulator. They can evaluate complex, high risk/high return products/services and negotiate terms flexibly to protect their interests.
The Sebi’s regulations generally are models of micro-management. Having seen small investors repeatedly suffering and, perhaps, also considering the reality of Indian markets, the rules in capital markets tend to provide for elaborate controls. Parties cannot, even by mutual agreement, waive such requirements. A portfolio manager, for example, cannot accept a client with less than Rs 50 lakh of investment, even if the client is well-informed/capable. They also cannot invest more than 25 percent of the portfolio in unlisted securities under discretionary management, even if client is agreeable.
There are similar restrictions on Alternative Investment Funds, Investment Advisers, etc. The result is needy issuers are deprived of funds and well-informed investors deprived of avenues with a potential of higher returns.
Sebi had initiated the process in February by issuing a consultation paper proposing a framework for Accredited Investors. While the regulations containing the fine print should be released soon, many of the details are known through the paper and in the summarised decision of Sebi as announced.
A person will be identified as an Accredited Investor on the basis of net worth or income. For example, an individual/family trust can be an Accredited Investor if their annual income is at least Rs 2 crore or net worth is at least Rs 7.50 crore, with at least half of it in financial assets. Or it can be a combination of at least Rs 1 crore annual income and a net worth of Rs 5 crore (with at least half in financial assets).
For other trusts, a net worth of at least Rs 50 crore can qualify them as Accredited Investors, while for corporates, a net worth of Rs 50 crore is necessary. Similar parameters are provided for non-residents. Government departments, developments agencies and Qualified Institutional Buyers, etc. would be Accredited Investors without any such minimum requirement.
Strangely, and unlike in some countries in the West, Sebi has not permitted educated/experienced investors to qualify as Accredited Investors.
Further, merely having a minimum income/net worth is not enough. A formal certification as an Accredited Investor is needed from certain bodies recognised for this purpose. Curiously, the certificate would be valid only for one year at a time, and will have to be renewed annually.
Persons who desire to provide financial products/advice to Accredited Investors will not only need to obtain a copy of these certificates from their clients, but will also need to additionally reconfirm the same. This seems a needless additional hurdle.
The paper proposes that the relaxation for transactions with Accredited Investors can either be with regard to minimum amount of investment or with regard to the terms of investments. For example, a portfolio manager can accept investment from an Accredited Investor for less than Rs 50 lakh but then will need to comply all the rules. To get relaxation from rules, however, the amount to be invested would have to be higher than the prescribed minimum. This does not make sense as once a person is identified and certified as an Accredited Investor, it ought not matter what amount they invest and at what terms. But perhaps Sebi wants to go slow and learn from experience, and then make further relaxations gradually.
It will be possible to make tailor-made complex products for Accredited Investors with rules being considerably relaxed. This will help parties entering into flexible arrangements whose risks they are aware and find acceptable.
The new concept benefits intermediaries, investors and, indeed, the market. It should also result in availability of far more funds, from many more persons and by many more issuers. Today, many of such investments simply cannot happen because of protective legal requirements.
It is not clear whether issuers themselves would be able to raise investments directly from Accredited Investors. For now, the proposal seems to be to give relaxations only to intermediaries such as portfolio managers, funds and investment advisers. If so, this is a major lacuna.
There are some further concerns. Even if a person is an Accredited Investor, they may not always want to waive the regulatory protection. Care would have to be taken in the paper work/agreements to ensure that there is no inadvertent waiver. It is common, however, that investors end up signing the dotted line without reading lengthy documents containing fine print. This is even more important considering that the benchmark for being an AI is only financial and not of knowledge/qualifications.
The question is also whether Sebi would still be available as arbiter in case of malpractices or for disputes between Accredited Investors and issuers/intermediaries? Or will the parties have to approach civil courts which are expensive and time consuming? One hopes that at least in case of frauds, manipulations and the like, recourse to Sebi would still be available, as it continues to be an expert and generally swift-footed regulator.
With all the shortcomings and half-hearted approach, the decision is still a major reform in capital markets. Let us see whether and how these concerns and questions are addressed in the detailed regulations that Sebi is expected to release soon.Views are personal and do not represent the stand of this publication.